AI Drafter 
TaxTMI 
TaxTMI 
2024 (8) TMI 356
X X X X Extracts X X X X
X X X X Extracts X X X X
....BILITY TO AVAIL BENEFIT UNDER INDIA-USA TAX TREATY 2. On the facts and circumstances of the case and in law, the Ld. AO as well as Ld. Dispute Resolution Panel ("DRP") have erred in not allowing to the Appellant, the benefit of India-USA Double Taxation Avoidance Agreement ("DTAA") by holding that the Appellant does not qualify as a tax resident thereof under Article 4 of the India-USA DTAA. TAXABILITY OF INCOME FROM DOMAIN NAME REGISTRATION. WEB HOSTING. WEB DESIGNING. SSL CERTIFICATION SERVICES ETC. 3. On the facts and circumstances of the case and in law, the Ld. AO as well as the Ld. DRP have erred in holding that the Appellant's receipts from domain name registration, web hosting, web designing, SSL certification services etc. amounting to INR 7,49,03,087/- should be brought to tax as fee for technical services/ fees for included services and in doing so, failed to appreciate: (i) that the receipts are not taxable under section 9(i)(vii) read with section 115A of the Act. (ii) that the receipts are not taxable under Article 12(4) of the India-USA DTAA (iii) that the services provided by the Appellant are standard servic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the year: for which it was not an LLC. Moreover, the assessee has not provided copies of any returns filed by it in USA. It may be pertinent to mention here that only if an otherwise disregarded entity chooses to get taxed in USA will it file its tax returns there. In order to understand the material relevance. of this fact, it is critical to gain a perspective of the prevailing laws in force in USA. The assessee is a limited liability company or an LLC as per the laws of USA. What this means is that income is not liable to be taxed in its hands in USA. Instead, it is taxed in the hands of the shareholders. Therefore, the assessee is a fiscally transparent entity in its country of resident as it allows all income to pass through it. In other words, it does not enjoy the benefits of the income it earns but passes it on for the enjoyment of its partners. Accordingly, the assessee lacks beneficial ownership of income earned by it from India and in turn is not eligible to be considered as a "resident" for the purposes of the India-USA DTAA. This issue was dealt with extensively in the "The Application of the OECD Model Tax Convention to Partnerships" Report of the O....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... whether it qualifies as a "resident". If the State in which a partnership has been organised treats that partnership as fiscally transparent, then the partnership is not "liable to tax" in that State within the meaning of Article 4, and so cannot be resident for purposes of the Convention. The Committee agreed that for the purposes of determining whether a partnership liable to tax, the real question is whether the amount of tax payable on the partnership income is determined in relation to the personal characteristics of tt partners (whether the partners are taxable or not, what other income they have, what are the personal allowances to which they are entitled and what is the tax rate applicable to them). If the answer to that question is yes, then the partnership should not itself be considered to be liable to tax. The fact that the income is computed the level of the partnership before being allocated to the partners, that the tax is technically paid by the partnership or that it is assessed on the partnership as described in the preceding paragraph will not change that result. Here, the main principle to be borne in mind is that if the income, though allocat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bjections before the DRP contending that the AO is grossly erred in not allowing the benefit of India USA DTAA alleging that the assessee is a fiscally transparent entity in USA and lacks beneficial partnership of income. Thus, it is not liable to tax and, therefore, cannot be considered as a resident for the purposes of India USA Tax Treaty disregarding the Tax Residency Certificate (TRC) filed by the assessee and also ignoring the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (263 ITR 706), wherein it has been held that liable to tax does not equate to actual payment of tax. However, the DRP rejected the contentions of the assessee observing as under: "DRP Directions: 3.1 The assessee is a non-resident incorporated in the USA. It has provided online database access pertaining to health to customers based in India. The assessee has stated that it has provided access to database which is in the nature of subscription made to a journal / magazine and that not part of the copyright was transferred. 3.2 The assessee has stated that it was converted into a Limited Liability Company during the year under consideration. Earlier it wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4. A broad structure of the holding pattern of the Appellant is reproduced hereunder: - 5. While denying the benefit of Double Taxation Avoidance Agreement ("DTAA") to the Appellant, the Ld. AO held as under:- ".....The assessee has furnished a TRC for only that part of the year for which it was not an LLC. Moreover, the assessee has not provided copies of any returns filed by it in USA. It may be pertinent to mention here that only if an otherwise disregarded entity chooses to get taxed in USA will it file its tax returns there........ "........The assessee is a limited liability company or an LLC as per the laws of USA. What this means is that income is not liable to be taxed in its hands in USA. Instead, it is taxed in the hands of the shareholders. Therefore, the assessee is a fiscally transparent entity in its country of resident as it allows all income to pass through it. In other words, it does not enjoy the benefits of the income it earns but passes it on for the enjoyment of its partners. Accordingly, the assessee lacks beneficial ownership of income earned by itfrom India and in turn is not eligible to be considered as a "resident" for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onstitutes a conclusive and sufficient evidence for tax residency and beneficial ownership of an income and is eligible to avail the benefit of the DTAA. In this regard, reference may be drawn from the decision of Hon'ble Supreme Court in the case of UOI vs. Azadi Bachao Andolan [2003] 263 ITR 706 (refer Page 61 to 96 of the case law paper book) wherein the Court upheld that validity of Circular 789 dated April 13, 2000, issued by Central Board of Direct Taxes ("CBDT"), thereby ensuring the applicability of India-Mauritius tax treaties having a valid TRC issued in Mauritius. 12. Furthermore, it is respectfully submitted that the Government of India issued a Press release dated March 1, 2013, re-iterating that Circular 789 (supra) continues to be in force and it has clarified that a Certificate of Residence issued by Tax Authorities of the other country will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAA. 13. In addition to the above, reliance is also placed on the recent decision of Sarva Capital LLC vs. ACIT [2023] 153 taxmann.eom 618 (Delhi - Trib.) (refer Page 97 to 115 of the case law ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enefits under India-Mauritius DTAA. The ratio laid down by the Hon'ble Supreme Court as aforesaid, was followed subsequently in a number of decisions and in a recent decision of Hon 'ble jurisdictional High Court in case of Blackstone Capital Partners (Singapore) VIFDI Three Pte Ltd. vs. ACIT (supra), has reiterated that the tax authorities in India cannot go behind the TRC issued by the competent authority in other tax jurisdiction, as the TRC is sufficient evidence to claim not only the residency and legal ownership but also Treaty eligibility. In case of MIH India (Mauritius) Ltd. vs. ACIT (supra), identical view has been expressed by the coordinate Bench. Thus, in our view, the Assessing Officer has committed a fundamental error in denying Treaty benefits to the assessee in spite of the fact that the assessee is having a valid TRC. " (Emphasis supplied by us) 14. Thus, it is most humbly submitted that the TRC filed by the Appellant will serves as a valid proof of tax residency and eligibility of the Appellant to claim DTAA benefit and therefore, the findings of the Ld. AO and Ld. DRP in denying the benefit under India- USA tax treaty are invalid and against the sett....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at the AO had stated that assessee had furnished TRC for only that part of the year for which it was not an LLC. However, the Ld. Counsel for the assessee invited our attention towards the paper book at pages 34 and 38, wherein copy of TRC issued by Department of the Treasury Internal Revenue Service, Philadelphia, USA and submitted that assessee was recognized as tax payer for the year 2019 and 2018. We observed from the TRCs issued by the Department of Treasury Internal Revenue Service, Philadelphia it was certified that the assessee Limited Liability Company (LLC) is a branch, division or business unit of US partnership. It was also certified that the partnership has filed an information return in Form 1065, US partnership return of income and each of the partners listed in the TRC i.e. GD Subsidiary Inc. and GoDaddy Inc. are residents of the United States of America for purposes of US taxation. Therefore, in our view these TRCs issued by Department of Treasury Internal Revenue Service, Philadelphia USA clearly recognizes the assessee Limited Liability Company having two partners are residents of United States of America filing US partnership return of income. Therefore, the obs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tention of Mr. Salve learned counsel for one of the appellants, that the expression 'resident' is employed in the DTAC as a term of limitation, for otherwise a person who may not be 'liable to tax' in a Contracting State by reason of domicile, residence, place of management or any other criterion of a similar nature may also claim the benefit of the DTAC. Since the purpose of the DTAC is to eliminate double taxation, the treaty takes into account only persons who are 'liable to taxation' in the Contracting States. Consequently, the benefits thereunder are not available to persons who are not liable to taxation and the words 'liable to taxation' are intended to act as words of limitation ".......... ............."85. In our view, the contention of the respondents proceeds on the fallacious premise that liability to taxation is the same as payment of tax. Liability to taxation is a legal situation; payment of tax is a fiscal fact. For the purpose of application of article 4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cluding capitaI gain from sale of shares has been granted under the domestic tax laws of Mauritius, it cannot lead to the conclusion that the entities availing such exemption are not liable to taxation. The Hon'ble Supreme Court categorically rejected Revenue's contention that avoidance of double taxation can arise only when tax is actually paid in one of the contracting States. Hon'ble Court held that 'liable to taxation' and 'actual payment of tax' are two different aspects. Thus, keeping in view the ratio laid down by Hon 'ble Supreme Court, as aforesaid, the reasoning of the Assessing Officer that since, the assessee is not liable to tax under Article 4 of the India-Mauritius Treaty, it cannot claim benefit of Treaty provisions, is liable to be rejected. " (Emphasis Supplied by us)" 15. We further observed that with respect to taxability of tax transparent entities such as single member LLCs being eligible to avail treaty benefits, the Mumbai Bench of the Tribunal in the case of Linklaters LLP Vs. ITO (supra) in the context of eligibility of LLP to avail the benefit of India UK Tax Treaty, the Tribunal has held that the India UK Tax Treaty would apply to a UK Limited Liab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble that, given the context in which the expression 'liable to taxation by reasons of his domicile, residence, place of management or any other criterion of similar nature' is employed i.e., in the context of ascertaining fiscal domicile - as evident from the title of article as 'Fiscal domicile', it is sufficient that under the assignment or distributive rules of the treaty, the residence State has a right to tax income of the partnership firm - irrespective of the fact the position whether or not such a right is actually exercised by the residence State. The undisputed objective of article 4 is to ascertain fiscal domicile of a person, and the heading of article 4, as we have reproduced earlier in this order, is "Fiscal domicile". In our humble understanding, as long as de facto entire income of the enterprise or the person is subjected to tax in that tax jurisdiction, whether directly or indirectly, the taxability test must be held to have been satisfied. Of course, the other possible approach to such a situation is that as long as the tax jurisdiction has the right to tax the entire income of the person resident there, whether or not such a right is exercised, the test of fisca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndia-USA. Ground no.2 of grounds of appeal of the assessee is allowed. 18. Coming to ground no.3 of grounds of appeal of the assessee the assessee challenged the order of AO/DRP with respect to taxability of income from domain name registration, web hosting, web designing, SSL certification services, etc. We observed that in the final assessment order the AO held that income is in the nature of technical services and is taxable in the hands of the assessee company as fees for included services under India-USA DTAA observing as under: "In the instant case the consultancy services are of technical nature, therefore, such services are included services as per the MOU. However, the taxability of such services would require crossing the "make available" clause threshold. The term 'make available' means that the person acquiring the service is enabled to independently apply the technology. The word 'enable' is used in the sense that the technical services should be such that they make the recipient able or wiser in the subject matter. Thus, where the recipient of technical services does not get equipped with the knowledge or expertise and the recipient would not be a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that he wishes to browse on his device to access that website. However, it is impractical to remember each website's IP address. To solve this problem, each website's IP address is assigned a domain name i.e. a name which can consist of alphabets and numbers and which a user can type on the internet (instead of IP address) to reach a website l. For instance, the domain name of the website of ITAT is "www.itat.gov.in". * Internet Corporation for Assigned Names and Numbers ("ICANN") formulates policies and inter alia helps in coordinating and supporting the registration and maintenance of domain names. For this purpose, ICANN enters into agreements with 'registries', who are in charge of and maintain a database of all the domain names. Each registry is certified by and subject to the direct supervision of ICANN. * Furthermore, ICANN has accredited over 2400 companies to act as 'registrars' (like the Appellant) whose function is to register the domain names of the customers/ registrants and facilitate the entire domain name registration process. * In a typical domain name registration process, a 'registrant' (i.e. the customer), desirous of registering a dom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or people to find a website and without web hosting a website cannot be active. * Accordingly, when someone enters the domain name in a browser, the domain name is translated into the IP address of the web hosting company's computer which contains the website's files, and it downloads the contents of the webpage on to user's computer. The Registrar merely plays the role of storing the website files of a domain name hosted by it and pulls up the files of such domain name upon request raised by the user. * WWD LLC provides web hosting services wherein it hosts the website of its users on its servers/ dedicated servers located outside India. Such websites are accessible from the servers by anyone on a 24x7 basis. Additionally, it also offers to install and configure supporting applications for such websites on its servers. * The Appellant is responsible for keeping the server up and running, implementing hosting security measures, and ensuring that data such as texts, photos, and other files are transferred successfully to the visitors' browsers who access the website. * It is relevant to note that the Appellant neither exercises any control over th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... safe pursuant to which its domain name will be preceded by HTTPS. * An SSL certificate is also represented by way of a padlock icon in the address bar on the web browser which ensures the trust and reassurance to those visiting the website that the website is secure. In the year under consideration, the appellant has earned INR 3,08,75,952 from web hosting services, web designing, SSL certification services 50. At the outset, it is humbly submitted that the Ld. AO has concluded the assessment proceedings of the Appellant on the basis of incorrect facts which, respectfully, shows lack of application of mind on part of the Ld. AO. 51. The Ld. AO has rejected the position adopted by the Appellant in its tax return, that income earned from provision of domain name registration, webhosting services etc is not taxable in India, without providing any cogent basis. It has blanketly concluded that the 'make available' provision stands satisfied and the services per se are technical in nature. Relevant extract of the order is reproduced below: "In the instant case the consultancy services are of technical nature, therefore, such services are incl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to Memorandum of Understanding ("MOU") entered between India and the U.S. to understand the meaning of the term "make available" wherein the term has been defined with suitable examples. 55. The MOU entered between India and the U.S. for "royalties and fee for included services" provides that for a fee to be regarded as fee for included services, the underlying assumption is that the same makes available any technical knowledge, experience, skill, know-how or process which enables the person acquiring the services to apply the technology. According to the MOU, mere rendering of services is not taxable as FIS unless the service recipient is able to make use of the technical knowledge, etc. without recourse to the performer of the services in future. A transmission of the technical knowledge, experience, skills, etc. from the person rendering the services to the service recipient is contemplated under the meaning of FIS. 56. The above understanding has been endorsed by various judicial authorities including the Hon'ble Karnataka High Court in the case of CIT vs. De Beers India Minerals (P) Ltd. [2012] 346 ITR 467 where the court held that in order to fit into the t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....formation and maps. That is the technical sendees which the Fugro has rendered to the assessees. The technology adopted by Fugro in rendering that technical services is not made available to the assessees. The survey report is very clear. Unless that technology is also made available, the assessees are unable to undertake the very> same survey independently excluding Fugro in future. Therefore that technical services which is rendered by Fugro is not of enduring in nature. It is a case specific. That information pertains to 8 blocks. The assessees can make use of the data supplied by way of technical services and put its experience in identifying the locations where the diamonds are found and carrying on its business. But the technical services which is provided by Fugro will not enable the assesses to independently undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey.«In that view of the matter, though Fugro rendered technical services as defined under Section 9(1) (vii) Explanation 2, it does not satisfy the requirement of technical services as contained in DTAA. Th....